Every founder wants growth. But what separates a growing startup from a healthy one?
Unit economics.
It’s how you figure out if you’re making money (or at least losing it wisely) every time you acquire, serve, or retain a customer.
What Is Unit Economics?
Unit economics refers to the profitability of a single unit of your product or service.
It helps answer:
“For every customer or order, are we making or losing money?”
A “unit” could be:
- One customer (SaaS)
- One order (e-commerce)
- One ride (mobility)
- One transaction (fintech)
Key Metrics in Unit Economics
| Metric | What It Means |
|---|---|
| CAC | Customer Acquisition Cost: How much it costs to acquire one customer |
| ARPU / AOV | Average Revenue Per User / Average Order Value |
| COGS | Cost of Goods Sold: the direct cost to fulfil one order |
| Contribution Margin | (Revenue – COGS – Variable costs) per unit |
| LTV | Lifetime Value: how much revenue a customer brings over their relationship with your brand |
If your LTV > CAC, your business model may be on the right track. If not, you’re scaling losses.
Example: Indian D2C Brand
Let’s take a fictional Indian skincare D2C brand: GlowLeaf.
- AOV = ₹700
- COGS (product + packaging) = ₹300
- Shipping = ₹80
- COD charges = ₹50
- Marketing cost (CAC) = ₹500
So the math looks like:
- Revenue per order = ₹700
- Total cost per order = ₹300 + ₹80 + ₹50 + ₹500 = ₹930
- Contribution Margin = ₹700 – ₹430 = ₹270 (before CAC)
- Unit Economics (after CAC) = ₹270 – ₹500 = –₹230
This means GlowLeaf is losing ₹230 per order.
However, if customers reorder 3x per year, and CAC stays the same:
- LTV = 3 × ₹270 = ₹810
- Now LTV > CAC, so unit economics improve over time.
This is why retention and repeat orders are so critical in D2C.
Why Unit Economics Matter (Especially in India)
1. Low AOV, High Fulfillment Costs
India has price-sensitive consumers and high logistics costs. You can’t just rely on scale, you must get your margins right.
2. Cash-Efficient Growth
With funding winters and cautious VCs, strong unit economics show you’re not just chasing vanity metrics.
3. Operational Leverage
As your order volume grows, CAC and COGS can go down. But the margin must be there in the first place.
4. Investor Conversations
VCs will ask:
“How much do you make (or lose) every time you serve a customer?”
If you can answer with confidence, you build trust.
When Bad Unit Economics Kill Scale
Remember food delivery in 2017–2019? Indian food delivery apps were practically paying you to eat. ₹1 biryanis, zero delivery charges – these kind of deals were everywhere. But behind the scenes, the economics were upside down:
- Each order cost the platform about ₹200 to fulfill.
- They made just ₹50 back from the customer.
- That’s a loss of ₹150 or more, every single time.
This “growth at any cost” approach led to massive cash burn and forced the industry to rethink its strategy as it wasn’t sustainable. Today, firms like Zomato and Swiggy are pushing subscription models, loyalty programs, and ad revenue to improve unit economics.
Key Takeaway
Don’t just chase scale. Fix your unit.
Every startup, whether it’s B2B SaaS, content commerce, or EdTech, should know:
- What does it cost to serve one user?
- How much do I earn from one user?
- How long does it take to break even?
If you can answer that, you’re growing smart.